Time for Serious Bank Restructuring: Prof. Amar Bhide

Too-Big-to-Fail Rules Hurting Too-Small-to-Compete Banks

Stuck in the middle are management teams at the world’s biggest banks, struggling to assure taxpayers, shareholders and traders that their pleas are being heard, Bloomberg Markets will report in its April issue.

In response to regulators, banks have reduced (BAC) their dependence on borrowed money. To answer investors, they’re cutting costs and exiting businesses that don’t deliver a big enough return on equity. Employees who haven’t lost jobs or fled to hedge funds are getting more of their pay in stock awards that are tied up for as long as five years.

The stakes are high. How executives finesse the competing forces will not only separate winners from losers; it will also determine the safety of the largest financial firms, those deemed too big to fail because their collapse would wreak so much damage that governments would be impelled to rescue them. …

… The industry’s legal bills have ballooned as practices such as shoddy foreclosures, interest-rate manipulation and money laundering came to light. Even CEOs such as JPMorgan Chase & Co.’s Jamie Dimon, whose New York-based bank reported a third consecutive year of record profit (JPM), have had trouble managing their sprawling organizations. Dimon has said he was unaware of complicated trading risks that led to more than $6.2 billion of losses last year.

“Who can tell what JPMorgan’s investment office is doing until after it’s blown up? Not even Jamie Dimon, so what chance does a supervisor have?” says Amar Bhide, a professor of international business at Tufts University’s Fletcher School of Law and Diplomacy in Medford, Massachusetts. “So for that reason, one needs serious restructuring of banks.”